Breaking Up Isn’t So Hard to Do

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With an economic downturn looming, more companies are likely to be stuck with excess office space this year. The good news: experts say that conditions are more favorable than ever to break leases with minimal consequences.

Normally, landlords charge high premiums for tenants to get out of leases. But because rents are continuing to climb, “we’re finding that in many instances we can buy out of leases at pretty attractive terms, because owners would like to get their hands on the space,” says Mark Ravesloot, executive vice-president at CB Richard Ellis’s Manhattan office. Buying out is almost always considered a better option than subleasing, which may not cover full rental costs and entails many contingent liabilities.

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Even when conditions aren’t ideal, there are ways to escape, says David Worrell, managing director of Carson City, NV-based Cambridge Real Estate Consulting. He says he has saved clients over $1.2 billion since 1986 by getting lease buyouts through pressure tactics, such as confronting landlords with building code violations or threatening to sublease the space to firms considered undesirable tenants, such as the U.S Post Office and non-profit advocacy groups. “It’s the squeaky-wheel principle,” says Worrell, who has even gone so far as to hand out flyers offering the space for free as a last resort when landlords won’t agree to a buyout. “Landlords lose their minds.”

Markets in which rents are in flux, like Silicon Valley and Austin, TX, are ripest for such tactics, says Worrell, who charges a fee based on how much he saves a company. “If a market is going up, landlords think they can get more rent and not have to deal with me. If it’s going down, they typically need cash to subsidize improvements for new tenants,” he explains. In markets with stable rents, like Chicago and Minneapolis, he says the squeaky-wheel approach more often falls on deaf ears.